Investing through a mobile app or a trading website has become extremely simple, safe and convenient, like never before. While investing in mutual funds, you have two options: invest a lump-sum amount or in a piecemeal manner, i.e., through a Systematic Investment Plan (SIP).
But have you heard of the Systematic Transfer Plan (STP)?
A systematic Transfer Plan or STP in mutual fund allows you to switch from one scheme of a mutual fund to another scheme of the same fund house. In other words, it is equivalent to exiting from one scheme at a preset frequency for a predetermined duration and utilising the same amount to purchase units of another scheme without involving any actual money transfer to and from your bank account.
This transfer happens at the scheme level.
Investing in an STP is a two-step process. In step one, an investor invests a lump sum amount in a mutual fund scheme—usually a debt-oriented scheme. Within debt funds too, usually an overnight fund or a liquid fund. For the purpose of STP, it is called a source fund. The next step is to give an instruction to transfer a fixed sum of money from the source scheme to the target scheme at a specified date and frequency.
For instance, you may decide to invest Rs 12 lakh in a liquid fund and start an STP of Rs 50,000 for 24 months in an equity fund.
In principle, the difference between STP and SIP is that we invest a lumpsum amount in STP while that is not needed in SIP. In SIP, money is transferred from a bank account to a mutual fund scheme, whereas under STP, it is transferred from one scheme to another. Moreover, you need to have a large investible surplus to take the STP route. SIPs, on the other hand, are light on your wallet.
Fixed STP: A fixed amount is transferred at predetermined intervals from a source scheme to a target scheme. You get a greater or lesser number of units in the target scheme, depending on market conditions.
Flexible/variable/booster STP: Based on the underlying formula used by a mutual fund house, flexible STPs help you take advantage of falling markets.
Capital appreciation STP: This option enables you to transfer the capital appreciation in the source scheme to the target fund.
Effective way of dealing with market volatility: Market volatility is the largest concern for investors who have large sums of investable capital at their disposal. What if markets tank soon after I invest in a lump sum? STPs help deal with such anxiety and make the need to time the market irrelevant.
Rupee-cost averaging: You accumulate more units of a target scheme when markets are under pressure and fewer units when the markets are rising. If you continue with an STP long enough, you can earn better returns through rupee-cost averaging.
Optimise asset allocation: Since an STP helps you deploy a lumpsum amount in a source scheme and transfer a predetermined amount to a target scheme through an automated route, it helps you diversify adequately.
Who should invest in STPs?
If you have a time horizon of more than 5 years and a high-risk appetite, besides a large amount of investable capital, you should opt for STPs. Here, the assumption is that the source scheme is a debt fund and the target scheme is an equity fund.
When will STPs be more effective?
If you have a lump sum of capital to deploy in the equity market and the market is down, STPs may not be the first choice. However, if markets are expensive and the outlook is uncertain, STPs may work best!
What is the minimum investment amount for STP?
The capital market regulator hasn’t prescribed any minimum amount for investing in STPs. Therefore, it depends on the minimum investment limits of individual schemes. Normally, mutual fund houses may require you to commit at least six transfers from a source scheme to a target scheme.
How do STPs affect mutual fund taxation?
Since a switch from one scheme to another is considered a redemption from one scheme and subsequent fresh investment in another, mutual fund taxation kicks in when you opt for an STP. Normal taxation rules should apply here. Capital appreciations from debt schemes are added to an investor’s income and taxed at applicable slab rates.
While short-term capital gains and long-term capital gains in equity schemes are taxed at 15% and 10% without indexation, respectively, dividends are considered taxable income as well and taxed at applicable slab rates.
Opting for an STP is quite similar to doing an SIP, only that you need a large amount of capital upfront. Benefits accrue over time through rupee-cost averaging and capital appreciation.